What is Part period balancing?
Part period balancing (PPB) is a lot-size technique that uses look ahead and look back functions to consider additional periods in modifying an initial calculation based on the least total cost.
In today’s Enterprise Resource Planning (ERP) system, Material Resource Planning (MRP) is integral.
MRP manages the production programs for finished and unfinished products. In addition, MRP monitors inventories and facilitates determining the specific quantity of material needed at a given date.
During this process, the calculation for the requirement of available stock or planned stock is compared with the primary requirements.
As the available inventory gets lesser than the required quantity, the MRP system initiates make-or-buy decisions by generating a procurement proposal.
It is also used to plan the order according to the changing date and quantities. In case of a shortage of materials, it must quickly adjust with the new requirement of procurement of materials.
MRP acts as an interface between demand and production planning, and also takes care of choosing the correct lot size for planning the production.
Lot size determines the quantity ordered during production. Lot sizes can be fixed or dynamic and are determined by the machine batch size, customer order, production size, and shipment size.
ERP systems are inbuilt with multiple heuristic methods to determine the lot size for the production unit. One of them is a Part Period Balancing heuristic method.
Part Period Balancing Heuristic Method
Part Period Balancing (PPB) method of lot-sizing minimizes the sum of ordering costs and inventory carrying costs for a single item.
In this method, the successive requirements of an item starting from the shortage date are grouped to form lots whose sum is less than equal to the lot size-independent cost.
We’ll consider an example of the item to be purchased for $20, lost size-independent costs: $100, and storage cost percentage: 10%.
Storage cost = Requirement * Price * Storage cost % * Time in Storage / 365
Calculations for Storage Cost:
Storage Cost = (1000 * 20 * 0.1 * 7 (in days)) / 365 = 38.36
The suitable date to order is 8th, for 2000 pieces of lot size as the total storage cost gets more extensive than the lot size-independent cost that is $100.
Though this example illustrates the basic calculations, the part period balancing algorithms are used in the ERP system to determine the exact lot-size holding period.
Why Part Period Balancing?
Part Period Balancing chooses a lot size that equals the demand for storage cost to the lot size. Using this method, we can make sure the holding cost is equal to and lesser than the ordering cost.
- This method determines the excess storage cost in advance, hence reduces the excess storage cost.
- In reality, the demand for the product is uncertain and keeps changing.
- This method can be applied to the dynamically changing lot size.
- As it decides the overall minimal cost, it reduces the overall cost of the manufacturing process.
Other Heuristic Methods
Apart from Part Period Balancing, there are various other methods to determine the Lot Size.
Fixed Order Quantity (FOQ): This method allows you to consider units arbitrarily to be ordered, or you can even add the lot size that is calculated outside the application.
Lot-For-Lot (L4L): This is planned according to the required quantity. For every requirement, the system creates the proposal as per the required quantity.
Economic Order Quantity (EOQ): Economic Order Quantity calculates the lot size based on the average demand over the period.
For example, an average for 6 periods, maybe 5 units. So for each period, this method orders 10 pieces.
This method increases the cost by increasing the holding size by ordering the units for the next period.
Silver-Meal Heuristic: This determines the best lot size holding period by examining the inventory cost.
For example, I am considering period k, where k>0, the average holding and ordering cost is calculated for all the k periods until the average price per period increases.
The best k is the last one where the average cost per period decreases.
Least Unit Cost (LUC): This includes the lot size that equals the demand of the future periods.
Though there are various heuristic methods to determine the correct lot size and hence helps to reduce the excess cost, the dynamics of the demand and supply of the product also play an essential role in minimizing the overall manufacturing cost.
Periods Of Supply (POS): POS allows you to order the lot size equal to the net requirements for a given number of periods.
Period Order Quantity (POQ): This method considers the average of EOQ, allows considering the fixed amount of future periods to include in each order. For example, EOQ / Avg. Period Usage
Least Total Cost (LTC): LTC, a heuristic method, allows you to compare the carrying cost and to order cost for various lot sizes and select the lot size where these costs are nearing equal.
In the current scenario, businesses experience dynamic scenarios during their growth period. Therefore, it is not possible to rely on a fixed lot size.
Selecting an appropriate heuristic method to calculate the lot size is a challenging task. Part Period Balancing is widely used as a dynamic lot-sizing technique for the current and future manufacturing process.
During the Material Requirement Planning process, determining the lot size is an important task. In this article, we have considered one of the prominent lots sizing heuristic methods, “Part Period Balancing.”
Part Period Balancing is one of the dynamic lot-sizing heuristic methods. It determines the appropriate lot size by limiting the total storage cost of items to the cost of lot size.
We have also seen alternative heuristic methods to determine the lot size during the production and planning tasks.